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Shockwaves From U.S. Shale Boom Could Oust OPEC

North America to provide 40% of new oil supplies, says International Energy Agency.

The U.S. shale boom will send “shockwaves” through the global oil trade over the next five years, benefiting the nation’s refiners and displacing OPEC as the driver of supply growth, the IEA said.

North America will provide 40 percent of new supplies to 2018 through the development of light, tight oil and oil sands, while the contribution from the Organization of Petroleum Exporting Countries will slip to 30 percent, according to the International Energy Agency. The IEA trimmed global fuel demand estimates for the next four years, and predicted that consumption in emerging economies may overtake developed nations this year.

“The supply shock created by a surge in North American oil production will be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15,” the Paris-based adviser to 28 oil-consuming nations said in its medium-term market report today.

The development of U.S. shale resources, enabling the nation’s highest level of energy independence in two decades, is creating a “chain reaction” in the global transportation, processing and storage of oil that may escalate as other countries try to replicate the American oil boom, according to the IEA. Crude futures for settlement in 2018 are trading at a discount to current prices, signaling expectations for increasing supplies and constrained demand.

Brent crude for settlement in 2017 is about $12 a barrel cheaper than front-month prices on the ICE Futures Europe exchange. June contracts were near $102.60 today, while futures for December 2017 were at $90.39 a barrel.

Global oil demand will increase by 6.1 million barrels a day, or 6.7 percent, to 96.7 million a day by 2018 as the economic recovery gathers pace, the IEA said. Demand estimates for 2017 are about 95,000 barrels a day less than forecast in the agency’s previous report, as weaker-than-expected growth this year crimps subsequent annual totals.

Most of the new production will come from outside OPEC, according to the IEA, which last year had predicted that supply growth would be spread equally between the two blocs. Non-OPEC producers will bolster output over six years by 6 million barrels a day to 59.3 million a day to 2018 while OPEC crude capacity will rise by 1.75 million a day, the agency forecast.

North America

“The U.S. production comes as a godsend solution for a market where emerging market demand is continuing to increase, while supply in the Middle East and North Africa won’t increase that much,” Bjarne Schieldrop, chief commodity analyst at SEB AB in Oslo, said today.

North American production will increase by 3.9 million barrels a day from 2012 to 2018, making up more than half of the non-OPEC gain. Access to these supplies has rescued many U.S. refineries from closure and will secure their place as exporters of gasoline and naphtha, while hurting other operators that aren’t configured to process the new lower-sulfur, low-density crude, the IEA said.

“Tight oils are a very important source of current supplies, and will be for the foreseeable future, but one shouldn’t get carried away,” said Amrita Sen, chief oil market analyst at Energy Aspects Ltd. in London. “If we get a few years of oversupply, prices falls, and we will see tight oils output fall.”

OPEC will bolster crude capacity to 36.75 million barrels a day in 2018 as Iraq, the United Arab Emirates and Angola increase output, the IEA said. The total is 750,000 a day less than had been predicted for the period of 2011 to 2017 in the agency’s previous report, as militant attacks and political violence delayed projects in Algeria, Libya and Nigeria.

“Increased violence by Islamist extremists and militants, combined with political instability across much of north and west Africa since the start of the Arab Spring in 2011, is changing the equation for acceptable risks for international oil companies,” the agency said.

Demand for OPEC’s crude will be 30.4 million barrels a day in 2018, an increase of less than 1 percent from last year’s call-on-OPEC of 30.12 million a day, according to the report.

OPEC’s 12 members are currently producing more than this level, pumping 30.7 million barrels a day in April, the IEA said in a separate monthly market report.

Oil use in emerging nations may surpass consumption in the Organization for Economic Cooperation and Development as early as this quarter, and is forecast to expand by 1.4 million barrels a day, or 3 percent, a year to 2018, according to the report. In contrast, demand in the OECD will contract by 250,000 a barrels a day, or 0.6 percent, a year in the period.

Lower Gear

Demand growth in China, while still the biggest driver of the global expansion after increasing “exponentially” in the past decade, will “shift to a lower gear,” averaging 2.4 million a barrels, or 3.7 percent, a year in the period to 2018 as the country targets a more stable pace of economic development, the IEA said. China will consume about 12 million barrels a day in 2018, making it the second-largest oil user after the U.S.

The IEA increased its forecast for global oil demand in 2013 in the monthly report for the first time since January, following revisions to estimates of German gasoil consumption.

The agency raised the 2013 estimate by a “marginal” 65,000 barrels a day, predicting that world oil use will climb this year by 800,000 barrels a day, or 0.9 percent, to 90.6 million a day.

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